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    Deflation is a general decline in prices below zero percent inflation. It is often caused by a reduction in the money supply or credit, or a decline in spending. There are four basic types of deflation: cash building, bank credit, growth, and confiscatory. Deflation can be either benign, resulting from technological advances, or malevolent, resulting from an economic downturn. Benign deflation increases output and employment while malevolent deflation decreases output and can increase unemployment as demand falls. Historically, major economic crises like the Great Depression have involved episodes of deflation.

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    MACRO ECONOMICS- DEFLATION

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    Deflation is a general decline in prices below zero percent inflation. It is often caused by a reduction in the money supply or credit, or a decline in spending. There are four basic types of deflation: cash building, bank credit, growth, and confiscatory. Deflation can be either benign, resulting from technological advances, or malevolent, resulting from an economic downturn. Benign deflation increases output and employment while malevolent deflation decreases output and can increase unemployment as demand falls. Historically, major economic crises like the Great Depression have involved episodes of deflation.

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    6 views8 pages

    Macro Economics 66

    Uploaded by

    Danie
    Deflation is a general decline in prices below zero percent inflation. It is often caused by a reduction in the money supply or credit, or a decline in spending. There are four basic types of deflation: cash building, bank credit, growth, and confiscatory. Deflation can be either benign, resulting from technological advances, or malevolent, resulting from an economic downturn. Benign deflation increases output and employment while malevolent deflation decreases output and can increase unemployment as demand falls. Historically, major economic crises like the Great Depression have involved episodes of deflation.

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    of 8

    DANIE R

    215116066

    DEFLATIO
    N

    When the overall price


    level decreases so that
    inflation rate becomes
    negative, it is called
    deflation.

    HIGHLIGHTS
    A general decline in prices over time below zero%
    inflation.
    Often caused by a reduction in the supply of money or
    credit.
    It can also be caused by a decline in government,
    personal, or investment spending.
    Deflation and disinflation are not same.
    Increased unemployment since there is a lower level of
    demand in the economy, which can lead to an economic
    depression.

    Four Basic Types of Deflation


    Cash Building Deflation

    : people savemore money, which decreases


    the use of money but increases the demand for money. We call this
    demand side price deflation.

    Bank Credit Deflation: a decrease in the credit supply of the


    bank and a contraction of the money supply from a nations central
    bank.

    Growth Deflation: decrease in the Consumer Price


    Index and an increase in the supply of goods. This is called
    supply side price deflation.

    Confiscatory Deflation

    : is afreezing of bank
    deposits and a decrease of the money supply

    Good deflation (benign)


    v/s
    Bad deflation
    (malevolent)
    Benign deflation:
    falling prices
    resulting from
    technological
    advances across the
    economy

    Malevolent deflation:
    falling prices resulting
    from a significant
    downturn in economic
    activity

    Good
    (benign)
    This deflation
    comes about
    from
    the LRAS shifting
    Output will increase and
    price levels with fall
    This assumes that AD
    remains (ceteris paribus)
    This will also give a
    lower level of
    unemployment (derived
    demand for labour from
    the increased demand
    for goods and services

    Bad deflation (malevolent)

    This comes about from AD shifting


    A downwards shift of AD will result in lower price
    levels but also lower output (less growth)
    As the labour is a derived demand, this could lead to
    an increase in unemployment
    Demand for goods and services will decrease
    If people think prices will go down they will put off
    consumption
    AD will keep falling

    Economic crises marked by


    episodes of deflation

    The
    The
    The
    The

    Recession of 1836 and the Panic of 1837


    Panic of 1873 and the Great Sag of 1873 1896
    Great Depression of 1929 1939
    Global Recession of 2008 - ?

    THANK
    YOU!

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